Labor integration is a major factor in deciding the viability of an AA and US Airways merger

Skift Take

It’s taken United more than two years to integrate a workforce of 88,000 employees meaning major headaches await American should it merge with US Airways for a total of 118,000 workers.

— Samantha Shankman

As American Airlines’ board meets next week, expectations are high that it will give more concrete shape to the airline’s plans to either merge with US Airways or stay independent.

The directors of parent AMR Corp plan to review a tie-up with its smaller rival against an alternative plan to exit bankruptcy as a standalone company, several people familiar with the matter said.

But the people close to the talks told Reuters they do not expect the AMR board to formally choose one option over the other next week, as detailed terms of a deal, such as price and the new management team, have yet to be hammered out. There are currently no plans for an announcement after the meeting.

The meeting that starts Wednesday could still provide clues about whether American is finding merit in the idea of merging with US Airways while it is still restructuring in bankruptcy.

AMR Chief Executive Tom Horton rebuffed an aggressive takeover push from US Airways early in the bankruptcy process, saying American preferred to exit court protection on its own and consider a deal later.

Now, after several months of talks with US Airways and AMR’s creditors, Horton has softened his approach at the insistence of the creditors’ committee and agreed to consider all options.

In a message to employees on Thursday, Horton said there’s no specific deadline for the evaluation to end, but the company expects to “bring this to a conclusion within a matter of weeks.”

“I can assure you we are conducting a collaborative, fact-based analysis to determine the best path forward for American,” he said.

US Airways, which has pursued the merger for more than a year, is hoping that AMR’s board recognizes the benefits of a combination and will choose to move quickly to negotiate final terms of a deal as soon as this month, the people said.

US Airways declined to comment for this story.

A deal in bankruptcy remains uncertain and could still founder on price or other issues. The pilots union for US Airways must still vote on how to integrate labor contracts, but the process got a boost late on Friday with a recommendation by the board of the US Airline Pilots Association. Other unions also are reviewing the details.

The equity split also remains at issue. US Airways’ formal merger proposal in November suggested that AMR’s creditors would own 70 percent of the merged entity, and the US Airways shareholders the remainder. AMR has said its creditors deserve closer to 80 percent.

Still, Horton’s new tone and other recent events suggest the combination long championed by US Airways and by pilot unions at both airlines will get a serious review by AMR’s board.

With one major obstacle – labor integration – appearing closer to resolution, AMR board members will be faced with a merger scenario that is becoming more specific.

The board of the Airline Pilots Association, the union representing AMR pilots, last week approved a memorandum of understanding laying the groundwork for how it would integrate its workforce with that of US Airways.

The board of the US Airline Pilots Association voted on Friday to recommend its member ratify that MOU. The move sent a “pretty strong message” of support, a pilot at US Airways said.

Voting is likely to take several weeks. If the union’s 5,000 members ratify it, the deal would mark a major step toward ensuring relative labor peace between the unions, something many tie-ups in the airline sector have historically lacked.

AMR leaders had previously warned that labor integration challenges could render any benefits of a merger smaller than what US Airways has said.

American is the last of the three major U.S. airlines to restructure through bankruptcy. AMR declared bankruptcy in November 2011 citing high labor costs, and eventually reached new, cost-saving contracts with its three primary unions, including its pilots, after bitter negotiations.

A bigger American?

A lot is riding on AMR’s choice. A tie-up with US Airways would give American Airlines the scale to match bigger rivals that are upgrading service and expanding international routes. Yet going it alone could spare the company the operational headaches associated with mergers, preserve existing management and give it more control over its destiny.

A combined American-US Airways would have revenue of $37.03 billion based on 2011 figures, on par with the $37.11 billion delivered by United Continental Holdings, which became the world’s biggest carrier when it was formed in 2010. The new American would have 118,000 employees, compared with some 88,000 at United.

The new carrier would have a solid presence on the important U.S. East and West coasts and on North Atlantic routes, given American’s revenue-sharing joint venture with British Airways and Iberia. American currently has East Coast hubs in Miami and New York, while US Airways has key operations in Philadelphia and Charlotte, North Carolina.

The East Coast operations could be structured in a way to make a combined American-US Airways more competitive against Delta Air Lines, which operates out of Atlanta and New York, and United Continental, which has a major hub in Newark, New Jersey. Delta and United are both the products of mergers.

A merged American “could potentially become the dominant player on the East Coast,” said John Wensveen, head of airline advisory services at Radixx International, which provides distribution systems and management consulting.

He said American already faces the prospect of greater competition for corporate clients on the lucrative New York-to-London Heathrow route now that Delta is buying a stake in Virgin Atlantic and plans to apply for a joint venture that would allow revenue-sharing.

Still, analysts say a combined carrier would have challenges such as integrating its workforce.

George Hamlin, an aviation consultant in Fairfax, Virginia, said US Airways staff working under bankruptcy-era contracts could expect to be brought up to the same pay level as American Airlines employees, likely raising costs of the combined entity.

“You need to sit down and carefully look at how all the pieces go together,” Hamlin said. “This would have an impact on the cost structure of American.”

American Airlines doesn’t have to take the merger path. Reported results since the carrier filed for Chapter 11 bankruptcy protection last year suggest the leaner company would be profitable when it emerges.

In the third quarter, American produced a profit of 33 cents a share, excluding one-time items. Earnings before interest, tax, depreciation, amortization and restructuring costs (EBITDAR) came to $1.61 billion.

With cost and revenue benefits from the bankruptcy filing included, AMR projects that EBITDAR figure could nearly double to $2.95 billion by the third quarter of 2013, according to data from the carrier.

But Helane Becker, an airline analyst with Dahlman Rose, said an independent American and US Airways would both face challenges of how to grow to compete effectively longer term.

“United and Delta would start to leapfrog them,” Becker said. “From American’s point of view as they are emerging from Chapter 11, they have to ask the question how do they go from $25 billion in revenue to $35 billion in revenue to compete with United and Delta.”

The case is In re AMR Corp et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-15463.